Slower Growing for North American Farm Equipment Makers
They may be strong and stable in the near term, but we have longer-range concerns.
Although sales growth in the United States and Canada is likely to remain sluggish this year, the management teams of Deere (DE), CNH (CNH), and AGCO (AGCO) share a sense of optimism for the near term. However, we're still concerned that the medium-run prospects for farm equipment manufacturers in North America could face headwinds stemming from reduced farm income and difficult year-over-year comparisons. Growth in emerging markets like Russia should lead to solid returns for the firms, but likely weakening in South America (due to recent droughts) and potentially Europe (stemming from economic headaches) further tempers our enthusiasm. We don't believe the market is currently offering a suitable margin of safety for these stocks, though we'd keep an eye on narrow-moat-rated Deere.
The total North American tractor and combine market climbed about 2% in 2011, and AGCO and CNH expect continued single-digit gains in 2012. However, Deere increased its forecast to 10% growth after its first-quarter report. Cash crop receipts will probably remain healthy this year because of lofty commodity prices, but we believe double-digit growth is a bit aggressive, given a potential flattening of crop receipts, higher input costs (such as fertilizer), and difficult comparisons in the high-horsepower market.
Adam Fleck does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.